Why financial reporting regulations and practices vary between countries?
Why do financial reporting practices differ across countries? Accounting scholars have hypothesized numerous influences on a country's accounting system, including factors as varied as the nature of the political system, the stage of economic development, and the state of accounting education and research.
The country's legal system is the most effective reason for the diversity of accounting principles from one country to another. Worldwide, two major types of legal systems used: The Common Law: Used by English Speaking countries. The Codified Roman Law (Code Law): Used by Non-English-Speaking countries.
Answer and Explanation: Different countries follow different accounting systems because every country has their own economic condition, Gross Domestic Product (GDP), level of national income, per capita income, etc. Moreover, business activities also differ per country.
Nobes (1998) argues that the two most important factors influencing differences in accounting systems across countries are (a) nature of culture and (b) type of financing system.
Harmonization refers to a process of reducing unnecessary differences in accounting across countries, while retaining a degree of flexibility. Harmonization allows different countries to have different standards as long as the standards do not conflict.
First of all each country does not have it's own set of accounting standards. Generally most either use U.S. Generally Accepted Accounting Principals (GAAP) or International Financial Reporting Standards (IFRS).
Legal and regulatory frameworks: Some countries have complex legal and regulatory frameworks that are not compatible with the principles of IFRS. Adapting to the requirements of IFRS may require significant legal and regulatory changes that could take time and resources to implement.
Accounting is often referred to as the "language of business." However, much like spoken languages, accounting practices can differ dramatically between regions. From regulatory frameworks to cultural influences, the way financial information is recorded, analyzed, and presented can vary widely.
IFRS is a set of international accounting standards, which state how particular types of transactions and other events should be reported in financial statements. Some accountants consider methodology to be the primary difference between the two systems; GAAP is rules-based and IFRS is principles-based.
Controversy has almost inevitably arisen when one country adopts another country's accounting methods. Part of the reason it is so difficult to generate one set of universally accepted accounting standards is the basis on which the standards are set.
What are the factors affecting accounting standards and practices?
The factors that influence the formulation of accounting standards include social and cultural values, political and legal systems, business activities and economic conditions, standard setting processes, capital markets and forms of ownership, and cooperative efforts by nations.
- Taxation.
- Level of education.
- Inflation.
- Culture.
- The legal system.
- Source of finance.
- The political and economic ties.
- The level of economic development.
Benefits of Diverse Accounting Firms
Accounting firms benefit from diversity in many significant ways such as increased profitability, improved employee cohesion, and retention of valuable professionals.
A survey of the relevant literature has identified the following five items as being commonly accepted as factors influencing a country's financial reporting practices: legal system, taxation, providers of financing, inflation, and political and economic ties.
Under GAAP, companies may have industry-specific rules and guidelines to follow, while IFRS has principles that require judgment and interpretation to determine how they are to be applied in a given situation.
The different ways in which IFRS might be used within a country include: Required of all companies domiciled within the country. Required of parent companies in preparing consolidated financial statements; national GAAP used in parent company-only financial statements.
International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world. The IFRS is issued by the International Accounting Standards Board (IASB).
IFRS also helps to foster transparency and trust in the global financial markets and the companies that list their shares on them. Without international reporting standards, investors could have less trust in the financial statements and other data presented to them by companies.
Approximately 120 nations and reporting jurisdictions permit or require IFRS for domestic listed companies, although approximately 90 countries have fully conformed with IFRS as promulgated by the IASB and include a statement acknowledging such conformity in audit reports.
IFRS (International Financial Reporting Standards) is not used in the US because the US government has not adopted it as the official accounting standard. The US instead uses its own set of Generally Accepted Accounting Principles (GAAP).
Which countries do not follow IFRS?
| Domestic unlisted companies | ||
|---|---|---|
| Code | Jurisdiction | Use of IFRSs by unlisted companies |
| IN | India | IFRSs not permitted |
| ID | Indonesia | IFRSs not permitted |
| IR | Iran | IFRSs not permitted |
The USA has not adopted the International Financial Reporting Standards (IFRS) for several reasons, including: Different accounting traditions: The US has a long-standing tradition of following its own accounting standards, known as Generally Accepted Accounting Principles (GAAP), which are different from IFRS.
International Accounting Standards (IAS) are a set of rules for financial statements that were replaced in 2001 by International Financial Reporting Standards (IFRS) and have subsequently been adopted by most major financial markets around the world.
IFRS. GAAP (US Generally Accepted Accounting Principles) is the accounting standard used in the US, while IFRS (International Financial Reporting Standards) is the accounting standard used in over 110 countries around the world.
More than 90 countries now require the financial statements of publicly traded companies to be prepared in accordance with the IASB's International Financial Reporting Standards ("IFRSs") (see IFRS use in various countries).
